by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar failed to make any headway in European trade on Monday and weakened to lows around 1.4735 in early US trading. The dollar stabilised around 1.4715, but with some dollar selling still evident ahead of the Tuesday’s FOMC decision.
There will be further caution ahead of Federal Reserve decision with residual speculation that the Fed could cut by 0.5% to help protect the economy. In this environment, the US currency should gain some relief if policy action is limited to a 0.25% rate cut. The statement will also very important for dollar confidence with a firm stance providing some limited support.
The US pending home sales data was stronger than expected with a 0.6% increase for October after a revised 1.4% increase the previous month which will maintain some hopes that the sector will be able to stabilise over the next few months and should ease pressure for a more aggressive Fed cut.
The US$10bn debt write-down from UBS, coupled with the freezing of redemptions from a Bank of America money market fund, increased credit-related fears to some extent. Any further spike in risk aversion would tend to be a small net positive for the US currency, but only if there were fears over the global economy as a concentration on US weakness would tend to undermine the dollar.
The ECB has retained a firm stance on monetary policy in official comments on Monday which will reinforce expectations that they will not consider an interest rate cut. The Euro-zone data will still need to be monitored closely and any evidence of sharp deterioration would undermine the Euro.
The yen weakened to lows beyond 111.80 in European trade on Monday before consolidating around 111.60 with selling pressure contained after the UBS and Bank of America developments. Fears over further losses and write-downs by major investment banks offered only limited yen protection.
Despite the adverse credit developments, risk tolerances have remained generally stronger which explains the lack of yen benefit. There has been optimism that central bank actions to cut interest rates will cushion the global economy from a sharp slowdown. In this environment, there has been a greater willingness to sell the yen, especially with speculation that year-end bonuses will be placed into overseas assets, but confidence could reverse quickly.
Domestically, there was a strong 12.7% increase in core machinery orders for October to give a 3.3% annual increase, although this is a very volatile series. Yen moves are also liable to be choppy in the short term as fluctuations in investor sentiment clash with tighter liquidity.
Sterling found support close to 2.03 against the dollar on Monday and strengthened significantly to highs around 2.0480 while the UK currency again regained the 0.72 level against the Euro.
UK input producer prices rose 1.7% in November with output prices rising 0.5% to give a 16-year high annual rate of 4.5%. The impact of the higher than expected headline figures will be offset by a small 0.1% increase in core output prices to give a 2.2% annual increase, but there will still be some unease over inflation trends.
Diminished expectations of a further near-term interest rate cut could underpin Sterling to some extent. There will, however, also be fears over some increase in inflation pressure at the same time as a deterioration in growth prospects which would put the Bank of England in a very difficult position and would eventually undermine the UK currency.
The Swiss currency weakened further against the Euro on Monday with lows close to 1.66 and the franc was unable to sustain gains through 1.1250 against the dollar.
Despite the additional UBS debt write-down, overall risk tolerances remained higher which curbed short-term franc support.
There will be further debate over interest rates with a consensus that the National Bank will leave interest rates on hold at Thursday’s meeting. Suggestions from bank officials of an increase over the next 48 hours would provide some short-term franc backing.
The Australian dollar found support below the 0.8750 level against the US dollar on Monday and pushed stronger to 0.8840 in US trade with renewed interest in high-yield currencies.
The domestic influences were still limited, although a 0.7% drop in housing finance for October caused some unease over domestic economic trends. Uncertainty over global growth conditions will also tend to curb strong Australian dollar buying support with choppy trading conditions liable to persist.